The three Weiss brothers signed the Amendment. Above their signatures is the following provision:

Each undersigned individual represents and warrants to JLI that the undersigned individuals are all of the shareholders or partners of Franchisee as of the date of this Amendment and that the officer who has executed this Amendment on behalf of Franchisee is duly authorized to bind Franchisee to the terms of this Amendment.

15. At the time Weiss Brothers became a franchisee, an ongoing dispute existed between Jiffy Lube and several of its franchises regarding the proper accounting of certain national or "fleet" customers. Rather than pay the individual franchisees, fleet customers were billed directly by Jiffy Lube's corporate headquarters, which later credited franchisees' accounts after deducting royalties and processing costs. Franchisees generally, and Weiss particularly, disputed the method of accounting used by Jiffy Lube in calculating the credits owed franchisees and also disputed the timing of the credits. Weiss argued that by delaying the granting of the credits Jiffy Lube deprived franchises of the opportunity to pay only a 4% "prompt payment" royalty, rather than the usual 5%. Weiss also argues that it was forced to pay excess interest charges because of the alleged delay in credits. Weiss Aff. at 7-8, 14, 16.

Jiffy Lube alleges in this application that it is being damaged by defendants' unauthorized use of its trademarks. The Third Circuit has held that:

The franchisor has the power to terminate the relationship where the terms of the franchise agreement are violated. Once a franchise is terminated, the franchisor has the right to enjoin unauthorized use of its trademarks under the Lanham Act. Thus, Jiffy Lube will merit preliminary injunctive relief if it can adduce sufficient facts indicating that its termination of [the franchisee's] franchises was proper.

S & R, supra, at 375.

As a federal court sitting in diversity, we apply the substantive law of New Jersey to determine whether Jiffy Lube's termination of the franchise was proper. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941); Erie RR Co. v. Tompkins, 304 U.S. 64, 78, 82 L. Ed. 1188, 58 S. Ct. 817 (1938). When the state's highest court has not addressed the precise issue in question, we must predict how the state's highest court would resolve the issue. Borman v. Raymark Industries, Inc., 960 F.2d 327, 331 (3d Cir. 1992). "In a diversity case, however, federal courts may not engage in judicial activism. Federalism concerns require that we permit state courts to decide whether and to what extent they will expand state common law." City of Philadelphia v. Lead Industries Ass'n, 994 F.2d 112 (3d Cir. 1993).

The New Jersey Franchise Practice Act, N.J.S.A. 56:10-1 et seq., expressly applies to the facts of this case: the franchisee maintains a place of business within the state of New Jersey, gross sales for the twelve months that preceded institution of this suit exceeded $ 35,000, and more than 20% of the franchisee's gross sales were derived from such franchise. N.J.S.A. 56:10-4.

Defendant Weiss Brothers' failure to comply with Paragraph 10 of Addendum B to the License Agreement and with Paragraph 21(B) of the Franchise Agreement constitute a "failure to substantially comply" with the requirements of the License and Franchise Agreements, and therefore constitute good cause for the Notice of Termination. See also Dunkin' Donuts of America v. Middletown Donut Corp., 100 N.J. 166, 178, 495 A.2d 66 (1985) ("Like its sister statutes in other jurisdictions, the New Jersey Franchise Act sensibly authorizes damages only to aggrieved franchisees and does not compensate those franchisees who have lost their franchises as a result of their own neglect and misconduct."); Simmons v. General Motors Corp., 180 N.J. Super. 522, 435 A.2d 1167 (App. Div.), cert. denied 88 N.J. 498, 443 A.2d 712 (1981) (allowing termination of franchise without any condition).

Whatever financial disputes existed between the parties, plaintiff was never informed that defendants intended to offset the amounts they believed were owed to them by Jiffy Lube by underpaying royalty fees. Allegations of improper accounting of "fleet credits" by Jiffy Lube, even if proven, would not entitle Weiss Brothers to stop performance (by filing false financial statements and underpaying royalties) and to continue use of the trademarks. S & R, supra, at 376. The franchisor's right to terminate the franchise agreement exists independently of any claims the franchisee may have against it. Id. at 375.

Even conceding that a valid dispute existed between the parties at the time defendant underreported gross sales figures, we simply cannot find that plaintiff's conduct in the dispute rises to the level of "fraud, accident, mistake, duress, or undue influence" that would vitiate its claims of good cause for termination of the franchise. N.J.S.A. 56:10-5; Dunkin' Donuts, supra, at 76. Indeed, efforts to resolve the confusion over royalty fees were hampered by the defendants' resistance to installation of the J-SMRT POS computer at the Turnersville site.

The accounting for debits and credits between franchisors and franchisees can often be very complex, and the amount of litigation this subject has engendered around the country suggests that these disputes may be the rule rather than the exception. Even taking the Weiss affidavit pretty much at face value, there is nothing to suggest anything in this case but a genuine commercial dispute. Such a dispute might, in some circumstances, justify a franchisee in openly taking a credit or setoff against a debt owed to the franchisor. It under no circumstances justifies furnishing false sales data to the franchisee. See Bak-A-Lum Corp. v. Alcoa Building Products, 69 N.J. 123, 351 A.2d 349 (1976) (noting implied covenant of good faith dealing and fair dealing); Palisades Property, Inc. v. Brunetti, 44 N.J. 117, 207 A.2d 522 (1965).

Defendants have hinted at the existence of a sinister, improper motive in plaintiff's vigorous efforts to terminate this franchise, but nothing in the papers really supports this theory. Only time will tell whether further proceedings before the final hearing will add substance to these vague hints.

Section 10-5 of the New Jersey Franchise Practices Act also provides that franchisors must give "written notice setting forth all the reasons for such termination . . . to the franchisee at least 60 days in advance." That requirement was satisfied by the mailing of the Notice of Intent to Terminate to Mr. Alfred J. Weiss on July 28, 1993.

That the immediate termination of the Jiffy Lube franchise may work a forfeiture does not alter Jiffy Lube's right to terminate. See Dunkin' Donuts, supra, at 182:

Id. (citations omitted) (emphasis in original). The Dunkin' Donuts court found that defendant's underreporting did not give rise to "extraordinary circumstances" that would merit equitable relief: "A franchisee who gets caught with his hand in the proverbial cookie jar, (or doughnut box, as the case may be) must suffer the known consequences." Id. at 186.

We note that in Dunkin' Donuts the Supreme Court opinion resulted in defendant losing an initial investment of $ 250,000. It is not surprising that in both Dunkin' Donuts and S & R the appellate tribunals reversed trial judges who, quite properly, were disturbed that a franchise termination produced harsh economic penalties for the defendants. With a free hand this court could probably fashion a remedy which would lessen that harm. But in doing so we would be making for the parties a contract that was different from the one to which they agreed and would be ignoring the binding precedent of both the Third Circuit and the New Jersey Supreme Court.

Since the franchise was properly terminated under New Jersey law, and since the termination of the franchise rendered defendant's subsequent use of the marks unauthorized under § 32 of the Lanham Act, 15 U.S.C. § 1114, plaintiff has a right to enjoin use of its trademarks if it can demonstrate that defendants' use of Jiffy Lube's valid trademarks is "likely to create confusion concerning the origin of the goods or services." Opticians Association of America v. Independent Opticians of America, 920 F.2d 187, 192 (3d Cir. 1990); § 43(a) Lanham Act, 15 U.S.C. § 1114.

Courts have found that "there is a great likelihood of confusion when an infringer uses the uses the exact trademark" as the plaintiff. Opticians, supra, at 195 (citing Jaycees, 639 F.2d at 142). In a factually similar case, where the former franchisee continued to use the trademarks of the franchisor after termination of the franchise, the Third Circuit found that "their concurrent use [of the trademarks] is likely to cause consumer confusion about [franchisee's] affiliation with the franchise." S & R, supra at 375. For this reason, the court held that Jiffy Lube had met its burden under §§ 32 and 43(a) of the Lanham Act. Id. at 375-76.

Under the New Jersey Franchise Practices Act, the Lanham Act, and applicable case law, plaintiff has adequately demonstrated a likelihood of success on the merits and its entitlement to a preliminary injunction barring defendants from using the Jiffy Lube marks.

Even if the defendants are enjoined from using the plaintiff's marks, Jiffy Lube argues that it would still be harmed by defendant's continued operation of a rapid lubrication service center under a different name. Plaintiff thus seeks a preliminary injunction enforcing the restrictive covenants contained in the License and Franchise Agreements, which prohibit defendants from operating the same or substantially similar business for five years within a ten-mile radius of the Turnersville site or any other Jiffy Lube site.

New Jersey cases have considered covenants not to compete executed in connection with an employment contract and those signed incident to the sale of a business. Restrictive covenants ancillary to an employment agreement are enforceable only insofar as they are reasonable under the circumstances. Solari Industries v. Malady, 55 N.J. 571, 264 A.2d 53 (1970); Whitmyer Bros. v. Doyle, 58 N.J. 25, 274 A.2d 577 (1971). This enforceability is governed by the three-part standard enunciated in Solari, 55 N.J. at 53: (1) it must protect a legitimate interest of the employer; (2) it may impose no undue hardship on the employee; and (3) it must not impair the public interest. Even if the covenant is found to be enforceable, it may be limited in its application concerning its geographical area, period of enforceability, or its scope of activity -- the so-called "blue pencil rule." Solari, 55 N.J. at 585; Coskey's T.V. & Radio Sales v. Foti, 253 N.J. Super. 626, 634, 602 A.2d 789 (App. Div. 1992).

However, notwithstanding the deference given to restrictive covenants made in connection with the sale of a business, there is no indication that New Jersey law denies to the court the right to "blue pencil" such a covenant to insure that it is reasonably tailored to meet the Solari test of reasonableness. See Rubel & Jensen Corp. v. Rubel, 85 N.J. Super. 27, 203 A.2d 625, 629 (N.J. Super. App. Div. 1964).

New Jersey courts have not passed on the issue of whether a covenant not to compete in a franchise agreement is more akin to an employment agreement or a sale of business agreement. See generally Annotation, Validity and Construction of Restrictive Covenant Not to Compete Ancillary to Franchise Agreement, 50 A.L.R. 3d 746-754 and Supp. [hereinafter Annotation]. The trial judge in Dunkin' Donuts created a remedy package that included enforcement of a covenant not to compete. However, since the Supreme Court focused on other aspects of the "creative remedy" fashioned by the Chancery Court, 100 N.J. at 175, there was no real discussion of this issue, and the matter was remanded to the trial judge to fashion a remedy in accordance with the Supreme Court opinion. S & R is inapposite because it did not deal with the New Jersey Franchise Practices Act.

Although we can find no clear New Jersey precedent, we predict that the New Jersey Supreme Court would rule that covenants not to compete in franchise agreements are closer to agreements ancillary to the sale of a business. The franchisee and franchisor are in a more equitable bargaining situation than the typical employer-employee relationship. More importantly, New Jersey courts have emphasized that the primary characteristic of a franchise is the license given to the franchisee to trade upon and exploit the franchisor's good will. Liberty Sales Assoc., Inc. v. Dow Corning Corp., 816 F. Supp. 1004, 1010 (D.N.J. 1993) ("What distinguishes a franchise from an ordinary distributorship is that the goodwill inherent in the name and mark attaches to the entire business of the seller, not just to the goods themselves."); Neptune T.V. & Appliance Serv., Inc. v. Litton Sys., Inc., 190 N.J. Super. 153, 160-61, 462 A.2d 595 (App. Div. 1983); cf. Piercing Pagoda, Inc. v. Hoffner, 465 Pa. 500, 351 A.2d 207, 211 (Pa. 1976) (holding that restrictive covenants in franchise agreements are enforceable to protect "the basic product which the franchisor has to sell, namely the franchise itself, . . ."); see generally Annotation, supra (collecting cases).

One can view a franchise agreement, in part, as a conveyance of the franchisor's good will to the franchisee for the length of the franchise. When the franchise terminates, the good will is, metaphysically, reconveyed to the franchisor. A restrictive covenant, reasonably crafted, is necessary to protect the good will after that reconveyance.

Having ruled that the covenant in question is to be examined under the more liberal standards applicable to the sale of a business, we next examine whether its provisions meet the three-pronged Solari test. The "protectible interest" prong is clearly satisfied. Jiffy Lube not only has a valid interest in protecting the good will it has developed over the years by having its franchisees do business at the Turnersville location, but it also has an interest in being able to place a new franchisee at or near the same location where this good will has been created. A reasonably crafted restrictive covenant is a legally acceptable means of protecting these interests.

Irreparable injury to the plaintiffs might also result if the restrictive covenants contained in the License and Franchise Agreements are not enforced. As discussed earlier, the purpose of the restrictive covenant in this setting is to protect the goodwill of the franchisor. Were we not to grant a preliminary injunction, the good will of the franchisor would be harmed by the existence of a competing service center at the very site of the former Jiffy Lube center. Since customers are likely to patronize businesses close to home or work, the operation of a second service center, even without the Jiffy Lube logo, would greatly impair plaintiff's ability to establish another franchise in the area.

In order to allow the defendants an opportunity to shut down their business in an orderly fashion and to appeal this decision to the Third Circuit, the effectiveness of the preliminary injunction will be stayed for a period of fourteen days and will not become effective until 12:01 A.M. on October 15, 1993. Fed. R. Civ. P. 62(a) and (c).

Because of its very serious impact on the defendants, this preliminary injunction shall not become effective until plaintiff posts a bond in the amount of $ 1,000,000 in accordance with the terms of Fed. R. Civ. P. 65(c). This amount is determined on the basis of the $ 500,000 paid by the defendants to purchase this franchise and on the basis of the considerable losses which will be incurred by the shutting down of this business. There is simply no doubt on the record before the court that the damages which "may be incurred or suffered by" defendants if they have been "wrongfully enjoined or restrained" may well exceed that amount.

For the reasons set forth above,

IT IS on this 1st day of October, 1993,

ORDERED THAT:

1. Pending further order of this Court, Defendant Weiss Brothers, Inc., its officers, agents, employees, representatives, and all persons in active concert of participation with it, and defendants Alfred Weiss, Rich Weiss, and John Weiss be RESTRAINED AND ENJOINED from:

c. Using the trademarks, tradenames, service marks, and logos of the Plaintiff;

2. The effectiveness of the preliminary injunction set forth in the first decretal paragraph is STAYED until 12:01 A.M. on October 15th, 1993;

3. The preliminary injunction set forth in the first decretal paragraph shall be not become effective until plaintiff shall have posted a bond, or made a deposit in lieu of surety as permitted by Local Rule 35A.1, in the amount of $ 1,000,000, which bond or deposit shall be approved by the Court and otherwise conform to the provisions of Fed. R. Civ. P. 65(c) and Local Rule 35.

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